Business context and reporting period
CenterPoint Energy, Inc. is a utility holding company with electric transmission and distribution, natural gas distribution, energy services, and an investment in Enable Midstream Partners. This unaudited Form 10-Q covers the three months ended March 31, 2017; comparisons are with the first quarter of 2016 unless stated otherwise. Results are seasonal and are not necessarily indicative of a full year.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $2.735 billion | $1.984 billion |
| Operating income | $274 million | $250 million |
| Net income | $192 million | $154 million |
| Diluted EPS | $0.44 | $0.36 |
| Operating cash flow | $319 million | $637 million |
| Capital expenditures | $312 million | $332 million |
| Cash and cash equivalents at period-end | $254 million | $341 million at Dec. 31, 2016 |
Revenue rose about 38%, while operating income rose about 10% and net income about 25%. Operating margin was approximately 10.0%, versus 12.6% a year earlier, reflecting a larger share of lower-margin Energy Services revenue. The filing does not present a separate consolidated gross-margin measure. The effective tax rate was 36% in both periods.
At March 31, total current assets were $2.896 billion and current liabilities were $2.642 billion, implying working capital of approximately $254 million and a current ratio of about 1.10. Reported long-term debt was $7.892 billion; current maturities and indexed debt add to reported borrowing obligations, while the $727 million indexed-debt derivative is a separate fair-value liability. Credit facilities totaled $2.5 billion, and the company reported covenant compliance. Shareholders’ equity was $3.537 billion.
Material changes versus the prior comparable period
- Energy Services revenue increased substantially, mainly reflecting the January 2017 acquisition of AEM and growth following the earlier Continuum acquisition. The segment’s operating income rose to $35 million from $6 million; management attributed $24 million of the increase to derivative mark-to-market accounting.
- Natural Gas Distribution operating income increased to $164 million from $160 million, helped by rate increases, a Minnesota property-tax refund, and customer growth, partly offset by milder-weather-related lower usage.
- Electric Transmission & Distribution operating income declined to $78 million from $83 million. Customer growth and distribution-rate increases were offset by higher costs, lower usage, and a lower equity return.
- Equity earnings from Enable increased to $72 million from $60 million. The company also reported $9 million of distributions on its Enable Series A Preferred Units in Q1 2017.
- Operating cash flow fell $318 million, primarily from working-capital movements, including lower cash provided by taxes receivable, margin deposits, inventory, and other current items. Investing cash use rose to $370 million, including $132 million for the AEM acquisition.
Outlook, management commentary, risks and unusual items
- Management expects the 2017 annual effective tax rate to be approximately 36% and says available credit facilities, commercial paper, operating cash flows, and Enable distributions are expected to meet anticipated cash needs for the remaining nine months of 2017.
- Anticipated remaining-2017 cash requirements include approximately $1.2 billion of capital expenditures, $250 million of maturing senior notes, $256 million of scheduled securitization-bond principal payments, dividends, and interest. These are estimates, not earnings guidance.
- Construction of the Brazos Valley Connection was proceeding as scheduled; estimated project capital cost was $270–$310 million, with completion expected by June 2018. A proposed approximately $250 million Freeport-area transmission project remained subject to ERCOT endorsement and regulatory filings.
- CenterPoint acquired AEM for a final purchase price of $147 million. AEM contributed approximately $359 million of revenue and $17 million of operating income in the quarter; reported results included $1 million of acquisition and integration expenses.
- Key sensitivities include weather, commodity prices and derivative mark-to-market effects, timely rate recovery, interest rates and access to financing, Enable’s performance and distributions, and major-project costs and approvals. A one-notch credit downgrade was not expected to materially affect facility borrowing costs, but could affect financing access, collateral requirements, or segment earnings.
- GenOn, which has indemnity obligations related to certain litigation, disclosed that it may be unable to continue as a going concern. CenterPoint said a failure by GenOn to satisfy those obligations could expose CenterPoint or subsidiaries to liabilities. The company did not expect the described legal and environmental matters to have a material adverse effect; its Minnesota manufactured-gas-plant liability was $7 million, with estimated possible remediation costs of $5–$30 million.
- Unusual volatility includes gains on marketable securities of $44 million (versus $90 million) and losses on the indexed-debt derivative of $10 million (versus $56 million). The company held $997 million of marketable securities at quarter-end and recorded a $727 million indexed-debt derivative liability. The expected AT&T-Time Warner transaction could alter the securities supporting ZENS and related tax and cash flows.
- The board declared a $0.2675 per-share quarterly dividend payable June 9, 2017. Enable declared Q1 distributions of $0.318 per common and subordinated unit and $0.625 per Series A Preferred Unit.
Most important facts for investors to verify
- Whether Energy Services’ revenue and earnings growth is sustainable, and how much depends on acquired volume versus volatile mark-to-market gains.
- Whether operating cash flow and working capital normalize after the sharp year-over-year decline, while funding the stated capital program and debt maturities.
- Progress, approval, cost recovery, and timing for the Brazos Valley Connection, Freeport proposal, and pending rate cases.
- Enable’s operating performance and distributions, as well as CenterPoint’s strategic review of its Enable investment.
- Potential exposure if GenOn cannot meet indemnity obligations, and any material change in ZENS-related obligations, securities, or tax cash flows.